Markets liked what they saw in the inflation data on Thursday (the S&P 500 was up 5.5 percent, its best day for over two years), not only because of hopes that a corner may have been turned, but also because of increased confidence that the Fed would think that the numbers were good enough to increase rates by only 50 basis points next time after a series of 75-bp increases.
Over the past week, Chairman Jerome Powell and other central bank officials have signaled that they would prefer to slow down the pace of rate rises, even without clear evidence that inflation was easing. Instead, they have tried to shift the focus to how high rates might have to rise.
Mr. Powell last week suggested that more stubborn price pressures—supported by strong consumer demand and a tight labor market—could require officials to raise rates next year to slightly higher levels than they had anticipated at the end of the summer. Back then, most officials projected rates would need to rise to between 4.5% and 5% early next year.
“We’ve seen a little bright spot on the data today, but again, I can’t reiterate enough that one month of positive data on inflation does not a victory make,” said San Francisco Fed President Mary Daly during a webinar Thursday.
Prices increased (month-on-month) by a seasonally adjusted 0.4 percent in October against expectations of 0.6 percent. Headline inflation (year on year) fell to 7.7 percent (that this is seen as good news tells you about the times we live in, but still), compared with expectations of 7.9 percent, and against 8.3 percent in September. Core inflation (the measure that excludes food and energy, and a number to which the Fed pays much more attention) also came in at below expectations at 6.3 percent (a 0.3 percent increase on a monthly basis as against an expected 0.5 percent gain).
Much of the easing of pressure was seen on the goods side, a function, in part, of retailers that “over-ordered” during the supply-chain mess and are now dumping inventories, but also a sign that might suggest that squeezed consumers are spending less. It is also worth noting that used-car prices, which have been in sharp focus since we began emerging from the pandemic, also eased on a month-on-month basis, and, in the view of the Wall Street Journal’s Justin Lahart, ought to fall further. That seems reasonable. “Shelter,” notes Lahart, is still pushing the headline number up, but that’s a lagging indicator. There are clear signs that rents have peaked, and house prices (which are reflected within this part of the index in a rather convoluted way) are clearly looking shaky. Shelter accounts for about a third of the index.
With the labor market still tight, I’d keep a eye on wage pressure, which feeds, of course, into higher services prices.
The Wall Street Journal has a more detailed breakdown of price movements here. The sharp year-on-year increase in energy costs come as no surprise, and, although it is not considered to be “core,” that’s not how consumers will feel.
Monetarists, meanwhile, will note that M2 is falling. To be sure, that’s from a very high level, but the fact that it is falling may matter more.
We’ve seen a false dawn before in this cycle, but there may be more reason this time to think that, absent an additional “external” shock, this may be the moment we have been waiting for. But even if this is the peak, we remain a long, long way from the 2 percent target (remember that?).